My friend Jim Cramer wrote a book titled Jim Cramer’s Real Money: Sane Investing in an Insane World. Needless to say, the first half of 2020 has been insane for markets and the world in general.
One had to decide in the first half of the year, whether to abandon stocks or, as is the true time-tested approach, stick with them for the long-term. The correct strategy was to stick with stocks. Though one needed to do so with one big caveat; to transform their portfolio to reflect the reality of the new world, impacted by the COVID crisis. This reality is reflected in the new style of conducting business and our daily lives, as remotely as possible. The major beneficiary of this change is Technology. The major casualties have been transportation, energy, and commercial real estate sectors
You see, we were living in a century-old paradigm. That paradigm began after World War 1 (1914-18) and coincidentally after the Spanish Flu Pandemic (1918-20). That century was dominated by massive immigration from foreign nations. Early on, in general, predominantly from Europe and then later from Asia. This is what made the great American melting pot. It became the fabric for our academic, industrial, and social society. Huge people movers, called for the most part subways and suburban rails helped to build our great cities. Skyscrapers were built to meet, and one could argue create business demand. Sports and entertainment became part of our evolving culture. Most of all, the United States supplanted military, industrial and financial dominance of the United Kingdom, which for the previous several centuries held that superiority. Post-WWII, the United States became a military-industrial behemoth. It is worth reading John Kenneth Galbraith’s The New Industrial State.
In 2020, that all began to change because of two major factors. First was the Covid-19 virus which was an unknown medical threat to the US and the World. Domestically, what made our cities great, those people movers, turned from an asset to a liability. Add to that social unrest and our cities began a descent into what I expect to be a permanent and irreversible great decline. As I foretold the Death of the American Mall I am now expecting the Death of the Old Great American Cities. Paradoxically, cities which do not rely on subways and skyscrapers for its economic engine will emerge as the New Great American Cities.
You might think differently, but I am paid to put money on the line to support my theories and research.
Separately, the emergence of the People’s Republic of China of PRC as an economic and military power threatens western dominance. Together with other bad actors around the world, the PRC became a threat that must be dealt with on many fronts: medical, technological, and industrial.
In a very short period of time, as investors, we had to recognize the end of the old paradigm and the beginning of a new one. In business school, we learn about SWOT analysis – Strengths, Weaknesses, Opportunities and Threats. More than ever before, I had to apply SWOT to the investing landscape as it now appeared before our eyes in the first half of the year.
For our Growth portfolio, I had to focus on the new way in which we will conduct business, commerce, and life in general. Dining out in restaurants will not be the same. Ordering delivery and take-out will be the new norm. Forget about commuting to large office buildings in large cities. Forget even about commuting to offices anywhere. Work-from-home will supplant commutation.
Education from K through senior year in college will change. Expect home schooling to become more normative than it is now. Many colleges will be going bankrupt and those that stay in business will be opting for online or hybrid taught classes. Tuitions will fall and dormitories will go vacant. Michigan Stadium may never pack in 107,000 fans for a Wolverines football game soon, or ever again.
Services such as medicine and legal will become commodities and internet driven. This will all take place while we confront the threats from the PRC. Supply chains will be brought back to the United States. Medicines and medical devices will be domestically derived. Urgent care and stand-alone emergency rooms will become commonplace. Doctors are filing for bankruptcy in large numbers.
Whether this new paradigm will be short-lived or last another century, is uncertain. The trend is clear that a new economic phenomenon is setting in. As we say on Wall Street, “The Trend is Your Friend.” Add to that the fact that we should expect low interest rates to continue for the foreseeable future. Perhaps for a whole generation. This conjures up another Wall Street adage, “Don’t Fight the Fed.”
The stock market turmoil and rebound this year are best presented in the comparative charts of two major indexes: S&P 500 (SPX) and NASDAQ 100 (NDX) presented below.
Click to enlarge chart
So far, the 3rd quarter began on a positive note. However, I am expecting sometime this summer a 5-10% pullback in the equity markets. Recent low stock market volumes might be the key to seeing this expectation come true. To preserve our gains in the Growth Strategy I have embarked on a hedging program to reduce risk and exposure to the equity markets. I am considering doing so as well in the Dividend Value portfolios. Worst case is that we forgo part of the upside. Best case is that we preserve capital to the downside and get ready for a potential rebound. Recall that liquidity dries up in the summer and volatility tends to result. My friend Mitch always predicts a market sell-off in the first week of August when we typically meet at Saratoga for a week of thoroughbred races, with our other friend Martin. Unfortunately, that will not take place this year, so we will be left to watching races simulcast from the Spa.
Please feel free to contact me if you have any questions as to how I can help you with your investing needs.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView Asset Management, LLC was not long any positions mentioned – although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right-hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ